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Hedge Hogs

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In his latest editorial (there have been several) on the looming debacle caused by the hedge fund industry, William Safire urges the SEC to register and regulate these "hedge hogs":

"I feel a certain responsibility for again banging my spoon against this hedge fund highchair because I wrote the 1971 Nixon speech suspending the convertibility of the dollar into gold. That necessary flotation, in which Fed Chairman Arthur Burns acquiesced, had an unintended consequence: it launched the frantic derivative dealing that inflated today's hedge fund bubble. (Who knew? Soros owes me big time).

At a time when the media is transfixed with blame-gaming, can we not spare a moment to connect the dots of a potential market crisis? Isn't this the time to shake the trees of Wall Street and Pennsylvania Avenue, to protect unwary pensioners and ultimate smaller investors?
America is running a real financial risk. We should fund and empower the S.E.C. to hedge against it."
Mr. Safire somehow extends his expertise on Washington politics to hedge funds, inheriting the financial expertise necessary from the part he played in convincing Congress to abandon the gold standard ("that necessary flotation").

I have no quarrel with the registration and regulation of hedge funds; I agree with him. I strongly disagree, however, with the broad brush he uses to portray hedge fund activities and his suggestion that their evolution has introduced new risks into the system.

Hedge funds have in all likelihood reduced risk because they have simply transferred these activities from broker dealers, which are on average levered 40 to 1 (hedge funds are levered on average 5 to 1). In this manner, hedge funds provide a great deal of liquidity to the markets, liquidity previously provided by broker dealers at a higher cost and risk.

Elsewhere in his article his contention that "Wall-Streeters are joining the stampede into managing these high-end mutual funds" is true, but it is to the betterment and not the detriment of the system: we want the best and brightest people controlling large amounts of capital.

There certainly needs to be controlled regulation of the hedge fund industry, but not to the point of stifling a growing and necessary development. Mr. Safire's portrayal of hedge "hog" managers as rumor spreaders, elsewhere in the article as well, is way off base and creates an atmosphere of alarm.

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